Introduction to investment risk:
Investment risk refers to the uncertainty about the future return on investment. The actual return on an investment may be lower than the expected return or the amount initially invested. Higher-risk investments tend to offer higher potential returns but also carry a higher likelihood of losing some or all of the initial investment.
Factors contributing to investment risk:
Examples of factors that can contribute to investment risk include changes in market conditions (such as stock market crashes), changes in company performance (such as bankruptcy or declining profits), changes in economic conditions (such as inflation or recession), and political events (such as war or natural disasters).
Understanding risk tolerance:
Investors need to understand and manage their risk tolerance, as it can affect the types of investments they choose and how they allocate their portfolios.
Specific risks in crowdlending platforms:
When investing in SME loans via a crowdlending platform, the main risks include:
- Default risk: borrowers may default on their loan, leading to a loss of invested capital.
- Lack of diversification: investing in only a few loans increases the risk of concentration and potential losses.
- Limited secondary market: difficulty selling a loan if you need to liquidate your investment.
- Operational risk: The platform can face technical or financial issues affecting loan processing or repayments.
- Credit evaluation risk: the platform's credit evaluation method may not accurately assess the risk of a loan, leading to potential losses.
Risk mitigation strategies:
To mitigate investment risks, consider:
Risk of investing in startups through equity crowdfunding:
Investing in startups through equity crowdfunding introduces a unique set of risks that investors should carefully consider. One significant risk is the high rate of failure associated with early-stage companies. Startups often face challenges in establishing a market presence, generating consistent revenue, and achieving profitability, posing a risk of capital loss.
Risk mitigation practices:
To mitigate these risks, investors should adopt the following practices:
What do we do at Acredius to protect your money?:
At Acredius, we prioritise the safety of our investors' funds. Our rigorous risk assessment and due diligence process are reflected in our outstanding track record - a proven zero default rate.
Our cutting-edge credit evaluation process for SME loans considers financial and alternative data to assess the borrower's creditworthiness comprehensively. By combining these data sources, we strive to minimise the default risk and improve our investors' loan performance.
Conclusion and Recommendations
Our platform is designed with the protection of investors in mind. By implementing a bankruptcy remote structure, we ensure that investors' assets are separated from the platform's assets and protected in the event of bankruptcy. This structure ensures that investors' funds are not subject to claims from the platform's creditors and are safe from potential financial loss. In other words, our bankruptcy remote structure provides an added layer of security for investors and helps to minimise the risk associated with investing in our platform.
At Acredius, informed investment decisions are key to our lenders' financial success. That's why we use a comprehensive risk scale to evaluate the creditworthiness of each borrower. Our risk scale ranges from A to D, with A indicating low risk and D indicating high risk. By using this system, we can provide our lenders with a clear understanding of the potential risks and rewards associated with each investment opportunity. Importantly, we emphasise that higher risk often comes with the potential for higher reward. By carefully considering the risk scale, our clients can make informed decisions about the right investments for them and their financial goals.